This article was originally published in Canadian Business.
Last month, I wrote about the too-little-too-late boomlet in popular commentary on the Bank of Canada’s mandate review, the most underreported Canadian business story of 2016. There was grumbling after. Some thought I was unnecessarily mean to the press corps. Others thought my suggestion that the House Finance Committee pay closer attention to monetary policy risked the central bank’s independence.
Nuance is the first to go when it comes time to fit an argument to a page, so apologies if I hurt anyone’s feelings or left the impression that I would like to see Finance Committee Chairman Wayne Easter get a seat at meetings of the Governing Council. My intent was to make the point that the public deserves a far livelier opportunity to debate monetary policy than it has been getting of late. I thought I would return to the subject because there is yet more evidence that the business of central banking is changing. In case you missed it, Bank of Canada Governor Stephen Poloz on September 26 delivered an important lecture on trade and monetary policy. Poloz avoided definitive conclusions, but he said enough to make it clear that the country’s most prominent economist is uncertain he can continue to rely on the lessons his university instructors taught him.
On October 5, Statistics Canada released trade data for August. Economists and reporters generally seize on non-energy exports because those are what the Bank of Canada is counting on to revive economic growth. But the StatsCan figures will present only a partial reading of the engagement of Canadian companies with the rest of the world. In that lecture at the end of September, Poloz noted that the sales of the international affiliates of Canadian companies are almost as large as the country’s exports. That matters. If Canada’s companies are doing as much business in other countries as they are at home, they will be less sensitive to changes in domestic interest rates and to the value of the Canadian dollar. In other words, in a highly integrated global economy, central banks may struggle to orchestrate the outcomes they want.
Poloz offered other observations. He presented evidence that globalization has caused incomes to disperse, creating greater numbers of richer people and poorer people, and reducing the size of the middle class. That’s significant because the rich and the poor are the least likely to change their behaviour after an interest-rate change: poorer people are simply trying to survive regardless of the cost of money; rich people will continue to buy and invest at will.
All of this raises the possibility that standard monetary policy no longer applies.
Read the full article at Canadian Business.